A value-minded owner should search for ways to lower the company’s perceived risks to potential buyers or investors by:
- Creating a formal business plan. Forecasts and projections facilitate due diligence and demonstrate management depth. But buyers might critique a seller’s business plan and modify them with their own assumptions. Budgeted and actual results should be constantly monitored to prevent “budget creep” and cost overruns.
- Minimizing reliance on key people. Because most private businesses rely on one or a few key individuals, it’s critical to have formal succession plans and signed noncompete agreements to reduce the strain on business operations, if a key person dies or otherwise leaves the business.
- Diversifying the customer (and supplier) base. Customer concentration is one of the biggest risks facing small and midsize businesses. Typically, buyers are concerned if one or more customers’ sales represent a large percentage of the company’s total annual sales (for example, 10% or more), especially if the relationships aren’t protected by a long-term contract.
Determining the value of a business is a complex endeavor. Typically, a valuator chooses one primary approach or method to derive an asset’s value, and uses one or two others to serve as checks or support of that value. The choice depends on several factors, including the valuation’s purpose (for example, merger and acquisition, tax, or shareholder disputes), the type of interest being valued (for example, controlling or minority) and the relevant standard of value (for example, fair market value or FMV, fair value or investment value).
How can American Business Appraisers Help?
When determining a company’s value, solid earnings are important. But other factors, based on a business’s individual characteristics, are also significant. If you understand the methodology that appraisers apply to evaluate how these elements and others affect a company’s value, you’ll be in a better position to make the right strategic moves.
Every individual situation is different and not everyone requires our appraisal services and sometimes just talking with one of our appraisers is all that may be necessary. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential.